State of Texas Debt – An OverviewState of Texas Debt – An Overview

January 24, 2007

Texas Bond Review BoardBob Kline, Executive Director

kline@brb.state.tx.us512-463-1741

www.brb.state.tx.us

1.1. IntroductionIntroduction

3

BRB vs. TPFABRB vs. TPFA

Bond Review Board – Oversight Agency• Approves state debt issues and lease purchases greater than

$250,000 or a term longer than 5 years • Collects, analyzes and reports information on debt issued by

state and local entities – on our website • Administers the state's Private Activity Bond Allocation

Program

Texas Public Finance Authority – Issuing Agency• Issues bonds and other forms of debt as authorized by the

Legislature.• Currently - 24 state agencies and 3 universities• Administers the Master Lease Program

4

Debt Issuance ProcessDebt Issuance Process

1. Legislative authorization and appropriation

2. Issuer Board approval

3. Bond Review Board approval

4. Bond sale (Negotiated/Competitive)

5. Bond closing – Attorney General approval

6. Ongoing Administration: paying debt service, federal tax law, change in use, arbitrage rebate compliance

5

Texas Debt IssuersTexas Debt Issuers

1. Texas Public Finance Authority (Universities: MSU, SFA & TSU)2. Texas Department of Transportation3. Texas Water Development Board4. Texas Veteran’s Land Board (General Land Office)5. Texas Department of Housing & Community Affairs6. Texas State Affordable Housing Corp7. Texas Higher Education Coordinating Board8. The University of Texas System9. The Texas A&M University System10. Texas State Technical College System11. Texas State University System12. The Texas Tech University System13. Texas Woman’s University14. University of Houston System15. The University of North Texas16. Texas Agriculture Finance Authority (Dept. of Agriculture)17. Office of Economic Development & Tourism

2. Debt Instruments2. Debt Instruments

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Types of State Debt InstrumentsTypes of State Debt Instruments

• Bonds: Long term (5+ years), fixed interest rate

• Notes: Short Term (<5 years)

• Commercial Paper (<1 year, usually 270 days), variable interest rate

8

What is a Bond?What is a Bond?

A contract between a borrower and a lender, specifying:

• When the loan is due (“term” or “maturity”) Example: 20 years

• What interest rate the borrower will pay Example: 5%

• When the payments will be made Example: Monthly, Semi-annually, annually

• What revenue source will be pledged to make the payments

9

BondsBonds

• “Taxable” – Interest earnings are taxable for federal income tax purposes

• “Tax-Exempt” – Interest earnings are exempt from federal income taxes• Lower Interest Rate – Investors will accept a lower interest

rate than taxable bonds, such as corporate bonds, U.S. Treasury Bonds, because they don’t pay taxes on the interest

• $1.00 (interest) - $.25 (taxes) = $0.75 (tax-exempt)

• Federal tax law limits issuance, investment and use of proceeds of tax-exempt bonds

10

Commercial PaperCommercial Paper

• Can be secured by the state’s general obligation pledge or by a specified revenue source.

• Maturity ranges from 1 to 270 days.

• As the paper matures, it can be paid off or reissued (“rolled over”) at a new interest rate

• Variable interest rate – usually much lower than long term interest rate

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Fixed Rates vs. Variable RatesFixed Rates vs. Variable Rates Revenue Bond Index vs. BMA IndexRevenue Bond Index vs. BMA Index (as of 12-31-06) (as of 12-31-06)

0%

1%

2%

3%

4%

5%

6%

7%

1/5/

2000

5/5/

2000

9/5/

2000

1/5/

2001

5/5/

2001

9/5/

2001

1/5/

2002

5/5/

2002

9/5/

2002

1/5/

2003

5/5/

2003

9/5/

2003

1/5/

2004

5/5/

2004

9/5/

2004

1/5/

2005

5/5/

2005

9/5/

2005

1/5/

2006

5/5/

2006

9/5/

2006

Revenue Bond Index BMA

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Yield CurveYield Curve

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Years to Maturity

Rat

e (%

)

Daily Treasury Yield Curve Rates (01/03/05) Daily Treasury Yield Curve Rates (01/19/07)

13

Swaps & DerivativesSwaps & Derivatives

• Derivative: A financial instrument whose characteristics and value depend upon the characteristics and value of an underlying index, typically a commodity, bond, equity or currency. Examples of derivatives include interest rate swaps, futures and options.

• Swap: A contract to exchange a stream of payments over time according to specified terms. The most common type is an interest rate swap, in which one party agrees to pay a fixed interest rate in return for receiving a adjustable rate from another party – Synthetic Fixed-Rate Debt

• Risk vs. Reward: Higher risk, greater return

14

Private Activity Bond ProgramPrivate Activity Bond Program

A private activity bond is a municipal bond which is either used entirely or partially for private purposes and is given federal tax- exempt status. General types of private activity bonds are:

• an exempt facility bond (Ex: airports, pollution control)

• a qualified mortgage bond

• a qualified veterans mortgage bond

• a qualified small issue bond

• a qualified student loan bond

• a qualified redevelopment bond

• a qualified 501(c)(3) bond

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PAB - Federal Program PAB - Federal Program

• “State Ceiling” or “Volume Cap” - Each state’s annual limit on the amount of Private Activities financed by tax-exempt bonds

• 2007 Volume Cap $85 per capita = $1.99B for Texas

• 2006 Volume Cap $80 per capita = $1.83B for Texas

• Congress has allocated $15B of PAB authority to be allocated by the U.S. Secretary of Transportation for eligible Highway projects and Rail-Truck Transfer Facilities. TxDOT has received provisional allocation of up to $1.87B for SH121.

16

How Texas Administers Its PABHow Texas Administers Its PAB

• Texas Legislature determines Texas allocation breakdown

• Bond Review Board (BRB) administers the program

• Reserved by lottery and priority within each calendar year

• Volume cap divided into six sub-ceilings through August 15 (Single Family Housing, State Voted Issues, Qualified Small Issues, Multifamily Housing, Student Loan Bonds and All Other Issues)

• August 15 – August 30: Any remaining cap is redistributed to ALL sub-ceilings with remaining applications

• September 1 – December 1: Remaining allocation distributed by lottery number

3. Types of Texas Debt3. Types of Texas Debt

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General Obligation (GO) DebtGeneral Obligation (GO) Debt

• Constitutional Pledge: Legally secured by a constitutional pledge of the first monies coming into the State Treasury that are not constitutionally dedicated for another purpose

• Voter Approval: Must initially be approved by a 2/3 vote of both houses of the legislature and by a majority of the voters; after this approval debt may be issued in installments as determined by the issuing agency or institution

• General Government functions: prisons, MHMR facilities, parks

19

Revenue DebtRevenue Debt

• Legally secured by a specific revenue source

• Do not require voter approval

• Enterprise Activities: utilities, airports, toll roads, colleges and universities

• Lease Revenue or Annual Appropriation Bonds

20

Lease PurchasesLease Purchases

• Lease purchases are the purchase of an asset over time through lease payments that include principal and interest.

• Lease purchases are typically financed through a private vendor or through one of the state’s pool programs such as TPFA’s Master Lease Purchase Program.

• Examples: State prisons and office buildings have been financed using lease-purchasing from special purpose non-profit finance corporations; equipment, vehicles, energy retrofits, software financed through the TPFA’s Master Lease Program

21

Tax and Revenue Anticipation Tax and Revenue Anticipation Notes (TRANs)Notes (TRANs)

• Issued by the CPA, Treasury Operations to address the cash flow mismatch between revenues and expenditures in the general revenue fund

• Repaid by the end of the biennium in which they are used, but are usually repaid by the end of each fiscal year

• Repaid with tax receipts and other revenues of the General Revenue fund

• Approved by the Cash Management Committee (Governor, Lt. Governor, CPA. Speaker is a non-voting member).

22

Debt Issued by UniversitiesDebt Issued by Universities• Revenue Bonds: Under Chapter 55 of the Education Code, universities

may issue revenue bonds or notes to finance permanent improvements for their institution(s). Most universities have established system-wide revenue financing programs which pledge all system-wide revenue, except legislative appropriations to the repayment of the revenue bonds and notes (“Revenue Financing System”).

• Tuition Revenue Bonds: The Legislature may also authorize “tuition revenue bonds”, usually for specific purposes or projects and appropriate general revenue to offset the institution’s debt service; legislative appropriations made directly for debt service would be unconstitutional.

• PUF/HEAF: The University of Texas and Texas A&M Systems may issue obligations backed by income from the Permanent University Fund (PUF), in accordance with Texas Constitution, Art. VII, §18. Texas’ other institutions may issue Higher Education Assistance Fund (HEAF) bonds, in accordance with Texas Constitution, Art. VII, §17.

23

Tuition Revenue BondsTuition Revenue Bonds

• In addition to the general authority of Chapter 55 of the Education Code, the Legislature periodically authorizes tuition revenue bonds for specific institutions, for specific projects or purposes.

• "Tuition revenue bonds" are revenue bonds issued by the institution, equally secured by and payable from the same pledge for the institution's other revenue bonds. However, historically the Legislature has appropriated general revenue to the institution to offset off-set all or a portion of the debt service on the bonds.

• Tuition revenue bond issues must be approved by the Bond Review Board, and the projects may have to be approved or reviewed by the Higher Education Coordinating Board.

4. General Revenue Impact4. General Revenue Impact

Self-Supporting vs. Not Self-Supporting

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Self-SupportingSelf-Supporting

• Self-supporting debt is designed to be repaid with revenues other than state general revenues. Self-supporting debt can be either general obligation debt or revenue debt.

• GO: Water Development Board debt repaid from loans made to communities for water and wastewater projects.

• Revenue: State Highway Fund debt, Housing and Community Affairs debt

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Not Self-SupportingNot Self-Supporting

• Not self-supporting debt is intended to be repaid with state general revenues. Not self-supporting debt can be either general obligation debt or revenue debt.

• GO: HEAF Bonds; TPFA Bonds, Water Development Bonds

• Revenue: TPFA Bonds, TPFA MLPP, Texas Military Facilities Commission Bonds

5. Texas State Debt5. Texas State Debt

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Constitutional Debt LimitConstitutional Debt Limit

• The Texas Constitution prohibits the issuance of additional state debt if the percentage of debt service payable by general revenue in any fiscal year exceeds 5% of the average of unrestricted general revenue for the past three years.

• For FY2006, this percentage was 1.33% of issued debt and 1.87%, including authorized but unissued debt.

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Constitutional Debt LimitConstitutional Debt LimitDebt service payable by GR as a % of the previous three years of unrestricted GR average.

Fiscal Year Issued Debt Issued + Authorized but Unissued

2006 1.33% 1.87%2005 1.51% 2.21%2004 1.51% 2.31%2003 1.51% 2.37%2002 1.42% 2.22%2001 1.47% 1.91%2000 1.51% 2.03%1999 1.58% 2.20%1998 1.60% 2.40%1997 1.80% 2.60%1996 1.90% 2.70%1995 1.80% 3.10%1994 1.90% 3.20%

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State Debt OutstandingState Debt Outstanding

Texas Debt Outstanding as of August 31, 2006* (billions)

Self-Supporting

Not

Self- Supporting Total

General Obligation $5,181 $2,353 $7,534

Revenue** $15,185 $623 $15,808

Total $20,366 $2,976 $23,342

*Includes commercial paper and variable rate notes; however does not include TRANs (short-term debt issued by the CPA, Treasury Operations for cash management purposes).

**Includes $5.8 billion of Tuition Revenue Bonds

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Historical State Debt Historical State Debt As of 8/31/06 (billions)As of 8/31/06 (billions)

$0

$5

$10

$15

$20

$25

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

GO Self Supporting GO Not Self Supporting Revenue Self Supporting Revenue Not Self Supporting

32

Texas Debt ServiceTexas Debt Service as of 8/31/06 (billions)as of 8/31/06 (billions)

$-

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

GO Self Supporting GO Not Self SupportingRevenue Self Supporting Revenue Not Self Supporting

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College & University Debt Outstanding College & University Debt Outstanding As of 08-31-06 (billions)As of 08-31-06 (billions)

$-

$1

$2

$3

$4

$5

$6

$7

$8

2002 2003 2004 2005 2006

PUF Rev Bonds TRB

34

College & University Debt Service College & University Debt Service as of 08-31-06 (millions)as of 08-31-06 (millions)

$-

$100

$200

$300

$400

$500

$600

$700

2006 2007 2008 2009 2010

PUF Rev Bonds TRB

6. Credit and Debt Affordability6. Credit and Debt Affordability

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Texas’ Credit RatingsTexas’ Credit Ratings

Texas’ current ratings are:Moody’s Aa1Standard and Poor’s AAFitch AA+

Rating agencies consider the following four factors in determining a state’s credit rating: • Economy

• Financial condition

• Debt burden

• General management practices

Moody's StandardTier Investors & Fitch

Ranking State Service Poor's Ratings

1 Delaware Aaa AAA AAA1 Georgia Aaa AAA AAA1 Maryland Aaa AAA AAA1 Missouri Aaa AAA AAA1 Utah Aaa AAA AAA1 Virginia Aaa AAA AAA2 Florida Aa1 AAA AAA2 Minnesota Aa1 AAA AAA2 North Carolina Aa1 AAA AAA2 South Carolina Aaa AAA AA+3 New Mexico Aa1 AA+ **3 Ohio Aa1 AA+ AA+3 Vermont Aa1 AA+ AA+4 Nevada Aa1 AA AA+4 TEXAS Aa1 AA AA+5 Washington Aa1 AA AA6 Alaska Aa2 AA AA6 Arkansas Aa2 AA AA6 Massachusetts Aa2 AA AA6 Michigan Aa2 AA AA6 New Hampshire Aa2 AA AA6 Pennsylvania Aa2 AA AA6 Tennessee Aa2 AA AA7 Alabama Aa3 AA AA7 Connecticut Aa3 AA AA7 Illinois Aa3 AA AA7 Mississippi Aa3 AA AA7 New York Aa3 AA AA7 Oklahoma Aa3 AA AA8 Hawaii Aa2 AA- AA-8 New Jersey Aa3 AA- AA8 Rhode Island Aa3 AA- AA9 Maine Aa3 AA- AA-9 Montana Aa3 AA- AA-9 Oregon Aa3 AA- AA-9 West Virginia Aa3 AA- AA-9 Wisconsin Aa3 AA- AA-9 Wyoming Aa3 * *

10 California A2 A+ A+11 Louisiana A2 A+ A

* State does not carry a G.O. ratingNote: States not listed do no carry a G.O. ratingSources: Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings.

STATE GENERAL OBLIGATION BOND RATINGSAugust 2006

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Texas’ Debt BurdenTexas’ Debt Burden

TOTAL STATE AND LOCAL DEBT OUTSTANDING: TEN MOST POPULOUS STATESTotal State and Local Debt State Debt Local Debt

StatePopulation (thousands)

Per Capita Rank

Amount (millions)

Per Capita Amount

Per Capita Rank

Amount (millions)

% of Total Debt

Per Capita Amount

Per Capita Rank

Amount (millions)

% of Total Debt

Per Capita Amount

New York 19,281 1 $219,358 $11,377 1 $95,710 43.6% $4,964 1 $123,648 56.4% $6,413

Illinois 12,712 2 102,304 8,048 3 48,726 47.6% 3,833 6 53,578 52.4% 4,215

Pennsylvania 12,394 3 96,374 7,776 5 25,996 27.0% 2,097 2 70,378 73.0% 5,678

California 35,842 4 269,935 7,531 4 104,008 38.5% 2,902 5 165,927 61.5% 4,629

New Jersey 8,685 5 64,272 7,400 2 35,770 55.7% 4,119 8 28,502 44.3% 3,282

TEXAS 22,472 6 146,009 6,497 9 22,926 15.7% 1,020 3 123,084 84.3% 5,477

Florida 17,385 7 108,764 6,256 8 25,740 23.7% 1,481 4 83,024 76.3% 4,776

Michigan 10,104 8 57,609 5,702 6 20,960 36.4% 2,074 7 36,649 63.6% 3,627

Ohio 11,450 9 57,898 5,057 7 22,183 38.3% 1,937 9 35,715 61.7% 3,119

Georgia 8,918 10 34,848 3,908 10 8,664 24.9% 972 10 26,184 75.1% 2,936

MEAN $115,737 $6,955 $41,068 35.1% $2,540 $74,669 64.9% $4,415

Note: Detail may not add to total due to rounding.Source: U.S. Census Bureau, State and Local Government Finances by Level of Government and by State: 2003-2004, the most recent data available.

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Texas Local Government DebtTexas Local Government Debt(as of 8/31/2005)(as of 8/31/2005)

($8.2 billion)

Counties

7%

($3.9 billion)

Other Special Districts & Authorities

3%

($1.4 billion)

Health & Hospital Districts

1%

($38.1 billion)

Public School Districts

32%

($20.5 billion)

Water Districts & Authorities

17%

($45.4 billion)

Cities, Towns, Villages

38%

($1.9 billion)

Community and Junior Colleges

2%

$119.4 billion total outstanding debt

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Independent School DistrictsIndependent School Districts

State supports School District debt through:

– Permanent School Fund (PSF) – guarantees repayment of debt service

– Instructional Facilities Allotment (IFA) and Existing Debt Allotment (EDA) Programs - appropriate General Revenue to school districts to offset portion of debt service

41

Debt Affordability Study (DAS)Debt Affordability Study (DAS)• Joint project between BRB, LBB, and TPFA

• Purpose is to provide information on the state’s debt burden and debt capacity

• Uses an Excel-based model to calculate five key debt ratios

• Focus of DAS is not self-supporting debt

• Debt capacity is defined as annual debt service

• Publication is scheduled for early February

42

Debt Affordability Study (DAS)Debt Affordability Study (DAS)• Ratio 1 – Debt Service as a Percent of Unrestricted

Revenues

• Ratio 2 – Not Self-supporting Debt to Personal Income

• Ratio 3 – Not Self-supporting Debt per Capita

• Ratio 4 – Rate of Debt Retirement

• Ratio 5 – Not Self-supporting Debt Service as a Percent of Budgeted General Revenue

7. Question and Answer7. Question and Answer

BREAKBREAK